UK gilts experienced a choppy month during May. The yield on the benchmark ten-year government bond rose above 1.55% during the middle of the month, but plummeted towards the end of May as investors sought safe havens, impelled by rising levels of anxiety over Italy’s political woes.
- Inflation fell to its lowest level since March 2017
- The OECD believes Brexit uncertainties will curb UK economic growth
- Service sector growth slowed in April
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UK gilts experienced a choppy month during May. The yield on the benchmark ten-year government bond rose above 1.55% during the middle of the month, but plummeted towards the end of May as investors sought safe havens, impelled by rising levels of anxiety over Italy’s political woes. Over the month as a whole, the yield on the ten-year gilt fell from 1.48% to 1.28%, while the yield on the short-dated gilt – which matures in 2020 – dropped from 0.81% to 0.61%.
“The BoE believes that the Brexit decision has harmed the UK economy”
Governor of the Bank of England (BoE) Mark Carney warned that a “sharper” Brexit could set monetary policy on a different path, but insisted the BoE remained “ready for Brexit whatever form it takes”. According to Mr Carney, sterling’s post-Brexit decline took place because “financial markets are valuing today what they expect tomorrow: a relative fall in real incomes as the UK moves toward its new trading arrangements”. The BoE believes that the Brexit decision has harmed the UK economy, calculating that household incomes are 4% lower than the Monetary Policy Committee (MPC) expected before the Brexit referendum in 2016. Moreover, in the event of a “disorderly” transition, BoE policymakers could be “confronted by a trade-off between the speed with which it returns inflation to target and the support policy provides to jobs and activity”.
The annualised rate of inflation – as measured by the Consumer Price Index – eased from 2.5% in March to 2.4% in April, falling to its lowest rate since March 2017. The news reduced speculation over the likelihood of an increase in interest rates. Meanwhile, the UK’s services sector grew more slowly than forecast during April, according to IHS/Markit, who warned that further slowing could raise questions about the advisability of last November’s increase in interest rates. Average earnings (excluding bonuses) rose at an annualised rate of 2.9% between January and March, outpacing the rate of inflation. Unemployment remained at 4.2%, its lowest levels since 1975
The Organisation for Economic Co-operation & Development (OECD) expects the global economy to grow by 3.8% this year and by 3.9% next year, but warned that a further escalation in trade tensions could “significantly” affect global economic growth. Elsewhere, the OECD has forecast economic growth in the UK of 1.4% in 2018 and 1.3% in 2019, and believes that persistent uncertainties surrounding Brexit are likely to hamper activity.